On May 4, 2015, Comptroller of the Currency Thomas Curry, Federal Reserve Board (FRB) Governor Daniel Tarullo, and Federal Deposit Insurance Corporation (FDIC) Chairman Martin Gruenberg held the third in a series of outreach meetings to discuss with the public their efforts to reduce the regulatory burden on community banks and savings associations (a rough transcript of the meeting is available here). The agencies’ assessment of these regulations is part of a larger review the agencies are undertaking pursuant to the Economic Growth and Regulatory Paperwork Reduction Act of 1996, which requires the agencies to review their regulations at least every ten years to identify and eliminate outdated or unnecessary regulations. The efforts of these agencies, along with those of the numerous other regulators, legislators, and private advocacy groups, to reduce regulation of smaller financial institutions could telegraph a significant shift in the landscape of the U.S. financial industry.
All three agencies present at the May 4th outreach meeting have expressed the view that the substantial regulations governing large banking institutions are not necessary for community institutions, and may actually jeopardize their viability. The Office of the Comptroller of the Currency (OCC), in particular, has offered a number of specific proposals to reduce the regulatory burden on community banks and savings associations:
- First, the OCC suggests that more community banking institutions be allowed to qualify for the 18-month on-site examination cycle, as opposed to the 12-month examination cycle required for larger banking institutions. The OCC proposes raising the asset threshold to qualify for the 18-month cycle from $500 million to $750 million. This change would qualify more than 100 OCC-supervised banks and thrifts for the extended cycle.
- Second, the OCC called for Congress to exempt community banks from the Volcker rule, which prohibits banking entities from engaging in certain proprietary trading and from owning or having certain relationships with hedge funds or private equity funds. The OCC’s proposal would exempt banking entities with assets of less than $10 billion – affecting an estimated 6,000 banks and thrifts.
- Third, the OCC has created a proposal that would provide federal savings associations the flexibility to expand their business model without having to create a new charter and governance structure.
Several of these proposals are already working their way through the legislative process. Congressmen Keith Rothfus (R-PA12) and James Himes (D-CT4) have sponsored the Federal Savings Association Charter Flexibility Act of 2015 (H.R. 1660), which was introduced in the House of Representatives on March 26, 2015 and would allow federal savings associations to operate as national banks simply by notifying the OCC. On May 12, 2015 the Chairman of the Senate Committee on Banking, Housing, and Urban Affairs, Senator Richard Shelby (R-Ala.), released the discussion draft of his Financial Regulatory Improvement Act of 2015. According to its sponsor, the proposed bill would institute a number of changes, including increasing the threshold for the 18-month examination cycle to include banks with assets under $1 billion. It would also implement the OCC’s proposal to exempt banks with $10 billion or less in assets from the Volcker Rule. Controversially, the bill would also raise the threshold for designating banks as systemically important financial institutions (SIFI) from $50 billion in total assets to $500 billion in total assets – freeing all but a handful of financial institutions from the substantial regulatory burdens that a SIFI designation entails.
In the meantime, the OCC, FRB, and FDIC are moving forward with their own administrative changes to the regulatory scheme governing smaller financial institutions, community banks, and savings associations. The agencies have indicated that they expect to publish joint notices announcing these changes within the next year.
There are three more agency outreach meetings scheduled on the topic of regulatory changes for community banks and thrifts – one (which will focus on rural entity issues) in Kansas City on August 4, 2014, one in Chicago on October 19, 2015, and the other in Washington, D.C. on December 2, 2015. Interested parties should consider attending one of these outreach meetings or responding to the notices for public comment to learn more about, or to provide commentary on, the agencies’ proposed regulatory changes.
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